恩橋 (ENB) 2006 Q2 法說會逐字稿

Yes, good morning, and welcome to the Enbridge Inc. second quarter earnings call. With me this morning are Pat Daniel, President and Chief Executive Officer, Steve Wuori, Executive Vice President, Chief Financial Officer and Corporate Development, Richard Bird, Executive Vice President Liquids Pipelines, and Colin Gruending, Vice President and Controller. During this conference call, we may refer to or speak to certain forward-looking information. Statements made with respect to forward-looking information are subject to a variety of risks and uncertainties pertaining to operating performance, regulatory parameters, economic conditions, and commodity prices. A more fulsome discussion of these risks is included in our filings which are publicly available on both the SEDAR and EDGAR systems. I would also note that our supplementary financial information package for the period 2001 to 2005 is now complete and is available on our Website under Financial Information -- Additional Resources.

This call is Webcast recorded, and I encourage those listening on the phone lines to view the supporting slides, which are available on our Website at www.Enbridge.com. A replay of the call will be available later today, and a transcript will be posted to our Website shortly thereafter.

When we move to q-and-a, I would ask that you limit your questions to one and then rejoin the queue. I would also remind you that I will be available after the call for any detailed follow-up questions.

At this point, I would like to turn the call over to Pat Daniel.

Great, thanks, Bob, and good morning, everyone. Thank you for taking the time to join us. It's been another great quarter for Enbridge, in fact, one of the best ever. We've had very strong financial results through the quarter, robust operations across the board in the company, and very significant progress on our strategic initiatives. Earlier today, as you know, we announced second quarter adjusted earnings of $118.7 million, which is up $23.1 million over quarter two of 2005, so on a year-to-date basis, operating earnings are up 9% over last year, and we're on a very solid footing to meet our full year guidance of $1.65 to $1.75 per common share.

Steve will give some more on the financials in a moment, but first let me just go through and update you on our strategic initiatives, and I am going to talk fast, because we've had a lot on the go and there's a lot I want to cover today, and I also am aware of your time. In the last month alone, the month of July, we have made two very important announcements regarding projects that are going to play very key roles in the future development of Alberta's oil sands resource. To cover those, first of all, on July 5 we announced the receipt of shipper commitments supporting our Southern Lights diluent pipeline. The open season is closed on that project now, and binding commitments are in hand. This, as you know, will be a 180,000-barrel per day pipeline. It's going to be the first major initiative to transport significant volumes of imported diluent required to move oil sands production to market. And the project is estimated to cost about $920 million U.S. in 2006 dollars, and it will be constructed at the same time as Southern Access, and it's going to be in service in that 2009 time frame. A final decision to proceed still requires support from existing crude oil shippers along with final permitting, of course, and public consultation and regulatory approvals on the project.

The Southern Lights project represents a very significant step forward in addressing this looming diluent shortage that we have in western Canada. However, it doesn't get us all the way there in terms of a solution. In order to achieve 1.8 million barrels per day of increased oil sands production by 2015, which is our forecast, up to 300,000 barrels per day of imported diluent are needed to transport that production to market. Both the U.S., Midwest, and Pacific Basin represent two abundant sources of diluent, and of course, Southern Lights taps the former, while our 150,000-barrels per day Gateway condensate pipeline draws on the latter. We're making good progress towards the finalization of commercial agreements related to Gateway, and I'm going to expand on the status of that project in just a moment.

When you bring Southern Lights and Gateway condensate together, this will be enough to meet forecast diluent needs early into the next decade. With about 2.1 million barrels per day of blended production looking for a home, the big question is, ''Where does all this crude go?'' and more importantly, ''What price does it command?'' The upper Midwest market, which has traditionally absorbed the majority of Canadian oil exports, is only capable of taking about one million barrels per day of this increased production. So in the absence of new market access, the upper Midwest market will be subject to further over crowding of Canadian crude oil and price discounting. And it's clear that more volume must move fast to Chicago.

Our first initiative on this front, of course, was the Spearhead pipeline, which extended our system into Cushing, Oklahoma, and then on Tuesday of last week, we announced the support by CAPP and our shippers of the next piece of market strategy, which is the Southern Access extension. This project is part of our overall Southern Access initiative, and it will extend the mainline's reach into the Patoka, Illinois, hub near St. Louis. This project will have an initial capacity to move 400,000 barrels per day past Chicago and expect it to be in service in early 2009. The project will cost about $350 million U.S., and it is easily expandable to 800,000 barrels per day at a relatively low cost, and that's an important consideration for future growth and expansion.

With the Spearhead operating into Cushing now, and Southern Access moving forward into Patoka, Enbridge will be able to offer Canadian producers the flexibility and diversity that comes with having access to two strategically important market hubs at the lowest available toll. It is critical, as I mentioned before, to disburse incremental volumes across as wide a market base as possible in order to ensure best pricing for producers. Access to both Cushing and Patoka opens up a variety of options to move western Canadian production into the Wood River, eastern PADD II, and U.S. Gulf Coast markets, as well, so it's very important from that point of view. Shippers have expressed an interest in looking at a more direct new-build solution from Alberta to the U.S. Gulf Coast, and we're now working with them to examine the feasibility of that alternative as well.

It's still very early days on that initiative, and we believe that at least 400,000 barrels per day of committed throughput is needed to justify what would be about a $3.6 billion pipeline to the Gulf. Some people are asking whether this is too much, all of this pipeline capacity. But with regard to total export capacity needs from western Canada, post our Southern Access initiatives, we see a need for at least three further increments of export capacity at approximately 400,000 barrels per day each. Now the CAP forecast, which is a little more bullish than ours, would call for four such increments over that period of time. The ability to power up Southern Access at low cost in combination with our proposed Alberta Clipper project, will represent a low-cost solution for moving up to 800,000 barrels per day of incremental production to U.S. markets, so about two-thirds of what we think would be needed.

The first phase of Alberta Clipper would move, would provide about 400,000 barrels per day at mainline capacity, and it would cost approximately $1.8 billion U.S. And then a second phase power up of 400,000 barrels per day can be added for approximately $400 million U.S., so very cost-efficient expansion of that project. Shipper consensus seems to support a common carrier format for Alberta Clipper at the fully integrated with the main line system, although those discussions are not finalized. But the Alberta Clipper could be in service as early as 2009 if required.

Beyond this point, it's our view that Canadian producers need access to global markets in order to ensure they receive the best pricing for their crude oil. And this is where our 400,000 barrels per day Gateway crude oil pipeline project comes into play. I think you're quite familiar with the project details, so let me just say that we're making progress towards finalizing the detailed commercial agreements on both the crude and the condensate lines. Our public and aboriginal consultation processes have been progressing well, and as expected, there are some challenges with regard to those consultations. However, we're confident that our package of benefits and mitigation will gain the support of most of the communities along the way. Subject to any refinements coming out of the Joint Review Panel, our NEB filing is substantially complete and will be filed when those detailed commercial agreements have been finalized and put in place.

So far we have over $13 billion worth of announced projects on the go in our liquids business alone, and many are asking how many of these Enbridge projects will actually go forward. And I believe that they all are going to go forward, and I'm going to give you half a dozen reasons why I think that's true, and I'm referring here primarily to Clipper and Gateway. First, our backbone mainline system into the heart of the Midwest market will be in the position to expand, to be expanded significantly by further powering up of the system. And as I indicated, a very cost-effective way in order to provide that expansion. Also, the size and scope of our mainline allows us to configure the system in a manner that minimizes operating costs, and this, in combination with relatively inexpensive capacity expansion, will allow us to offer the lowest toll available into those markets. We work very closely with our shippers, another reason why we expect all of these projects to go, and we work very closely in developing our projects and look to negotiate tolling settlements collectively through CAPP. Then with CAPP's support in hand, we're able to avoid protracted hearings and expedite the regulatory approval process. And we see that as a significant advantage that we have. Also, our existing right-of-way in the major pipeline corridor serving the U.S. market provides a competitive advantage by significantly reducing the execution risks on our projects.

And with Spearhead and Southern Access extension, we'll be able to offer both flexibility and diversity in terms of the products we can move to these market hubs, as well as being positioned to extend our system further to reach new markets. And then finally, we've worked very hard on the Gateway project for several years, and we feel we're well ahead of any alternative in developing access to new global markets on behalf of producers.

So let me now turn to the natural gas side of our business. I know that was a fairly lengthy run-through on the liquids side, but we do have an awful lot on the go. Gas operations are also robust across the board, and our asset base is well positioned with exposure to all the major sources of growing North American gas supply. For example, our U.S. partnership gas business has highly levered developments in the Anadarko north and east Texas Basins, areas of significant activity today. And this is great positioning, given that we expect production out of these basins to grow at between 4% to 5% per year out to 2011. Texas gas producers, very much like Canadian oil producers, need access to new markets to avoid potential over crowding and price discounting, which they're experiencing today. So on this front, our 700 million cubic foot per day project Clarity continues to gain support in the forces under constructions. We're now close to having over 75% of capacity under contract on that line. And this extends our system into a large southeastern Texas market and will come into service in 2007. Very important for the customers in that region.

At Enbridge offshore, we gather and transport approximately one-half of the deep water of the Gulf of Mexico production, and having this footprint is key to our further growth. The ability to grow in the Gulf is really all about proximity to new discoveries, and our pipeline systems are ideally positioned to take advantage of that. On June 20, we announced that we will extend our offshore infrastructure by constructing a gathering lateral to tie in the deep water Shenzi field, and in trend with this development, Enbridge and MarkWest announced that they had acquired a new lateral that will transport production from the West Cameron field to the Stingray Pipeline, so another important extension of that Gulf of Mexico system.

Moving into the distribution business at Enbridge Gas Distribution, we're moving forward with the cast iron main replacement initiative that we announced at the beginning of the year. And once again, we're on target to add another 50,000 new customers in the distribution franchise in 2006.

Continuing on with the gas business, on July 20, Alliance Pipeline, L.P., signed an MOU with Duke Energy Gas Transmission and New Jersey Resources Pipeline to look at building a new pipeline that would link either the Alliance or Vector pipelines into the Lebanon, Ohio hub for shipment to the east. It's been our view for some time that gas must clear the Chicago market, and the Lebanon connector would provide shippers with enhanced Midwest-Midatlantic connectivity. A non-binding open season is set to run from about July 28 through August 31 to get feel for shipper commitments on this project.

Most of our growth averages much more on the liquid side of the business, but we will also see significant growth out of the gas business over the next decade, in our view, and look forward to more opportunities there. Also, our international segment provides solid earnings diversification, and we continue to look for a third international investment.

At this point, let me turn things over to Steve Wuori to discuss in a little more detail the quarterly financials, and then I'll come up for a very brief wrap-up at the end.

Well, thank you, Pat, and good morning, everyone. Reported quarterly earnings were up significantly year over year, and the strong financial performance in the quarter is really underpinned by solid operating results across all the business units, offset by a small amount of foreign exchange drag in the gas pipeline segments. The positive $48.9 million revaluation of future income tax balances more than offset the earnings impact associated with warmer-than-normal weather that we experienced at Enbridge Gas Distribution. The tax revaluation was brought about by recent reductions in federal and also many of the provincial statutory tax rates. The quarterly earnings impact associated with warmer-than-normal weather at EGD was $9.4 million. Once again, the quarter is clean from an accounting standpoint. Adjusting for non-operating factors, results in $118.7 million of adjusted operating earnings, which compares with $95.6 million in Q2 of 2005.

Moving first to the liquids pipeline segment, it was once again very strong and on par with the first quarter of 2006. The segment contributed $15 million of the $23.1 million year-over-year increase in quarterly earnings, and the majority of this increase was delivered by the Enbridge mainline system. Performance of the mainline continues to be driven by lower oil loss costs than last year, and also higher toll and surcharge revenues associated with the Terrace expansion as well as additional earnings flowing from the Incentive Tolling Settlement, which we refer to simply as the ITS. Barring unforeseen developments, we expect continued strong performance from the mainline over the balance of the year. Recall that on the Q1 call, we indicated that the improvements in the oil loss cost experience should be sustainable, and that is still the case. At that time we also devoted considerable discussion to the increased Terrace performance and identified the mainline-based toll as a significant driver of that performance. The year-over-year increase in the base toll has translated into higher Terrace revenues, and we expect this to carry through the rest of 2006. Keep in mind that the annual base toll can move up or down based on a number of items that impact the mainline revenue requirements, including those features that are embedded in the ITS. The timing of taxes on Terrace is also contributing to a stronger performance this year. The overall ITS performance has been very positive to date, with contributions from both cost savings and performance metrics.

Just to finish comments on the liquid system, Athabasca performance is reflecting the growth we expected, and we are now picking up first-time earnings from both the Spearhead and the Olympic pipelines, both of which are exceeding our expectations so far.

Moving to gas pipelines, earnings at Alliance, Vector, and Enbridge Offshore were lower than Q2 2005, mostly due to the stronger Canadian dollar, which is expected to remain relatively strong throughout the balance of this year. Vector earnings were also impacted by costs associated with non-routine integrity inspections that are required to satisfy regulatory requirements, and those will likely continue somewhat into the third quarter. The earnings at Enbridge Offshore are lower than Q2 of 2005, reflecting the timing of upstream production coming back online post the two big hurricanes, Rita and Katrina. I am happy to note, though, that throughput volumes in the offshore systems have returned to levels that are near the 2.7 billion cubic feet per day that we saw before the hurricanes, and I'll note that we've also taken advantage of the delay in new volumes to advance on maintenance work on those systems.

In terms of sponsored investments, again, I think it's all good news. Strong performance at Enbridge Energy Partners is being driven by higher throughput volumes on the Lakehead system and higher margins and increased volume in the natural gas gathering and processing business.

Moving to gas distribution and services, the adjusted operating earnings increased $9.6 million over the second quarter of 2005. Stronger operating performance in EGD is being driven by a number of small items, including a change in the pattern of the O&M spending in Q2 2006 when compared to the comparable quarter in 2005. This, in combination with a higher approved rate base, is softening the impact of the lower regulated ROE that's reflected in current revenues.

The earnings on our sales were lower, even though fractionation margins are up dramatically over the comparable period of 2005. Just to remind you effective January 1, 2006, Aux Sable entered into an output agreement that provides a fixed fee plus an upside sharing of fractionation margins, and we are looking at some potential upside in 2006. But the amount of that sharing is determined on an annual basis, and any resulting revenue will not be booked until we have greater certainty.

In international, I'll just say that both CLH and the OCENSA system continue to deliver solid performance and earnings.

And finally, in the corporate segment, aside from the future income tax adjustments, corporate costs were up marginally, but in line with our expectations given our recent refinancing activity and higher related interest costs.

I think that completes my review of the quarterly financial results, and I'll turn it back to Pat for concluding remarks.

Thanks, Steve. The addition of each new piece of this market access strategy really adds to our relative comparative advantage as well as providing a platform to further expand and extend our liquids mainline system. I'm very confident that our $13 billion portfolio of liquids projects will offer customers the best possible solution to access to new markets and also improve the access to existing markets. We also are seeing very positive developments on the gas side, and as much as, as much liquids quote is the story today, it may well be that gas is in the not-too-distant future. So once again, thank you for your continued interest in Enbridge, and at this point we'd like to throw it open to questions.

[Operator Instructions]. And your first question comes from the line of Linda Ezergailis from TD Newcrest. Please proceed.

Thank you. Your Enbridge system was very strong in the quarter, and I realize there was three factors contributing to that. Can you give us a sense of magnitude of those factors in terms of lower oil losses, ITS performance incentives and Terraces, and within the ITS and Terrace, if you can give us a sense of what those sub-factors might be contributing to the growth in earnings, I'd appreciate it as well.

Sure, and I'll have Richard Bird speak to that.

Okay. Well, that's a lot of detail, and these factors are going to move around from period to period, but if we focus on this first half, rather than going quarter by quarter, because they do move quarter to quarter, the first half will give, I think, a little bit more of a sense of the significance on an overall basis. And I'm going to split oil losses just to clarify.

There's really two components to oil losses, one of which falls inside the incentive tolling settlements, and the others fall outside. Revaluation adjustments fall outside the settlements, and physical and degradation fall inside, so let me talk about three components in being the part of oil losses that fall outside of the settlement. Then everything that has to do with the settlement, and everything that has to do with Terraces, and the relative magnitude of those factors would be roughly equal between all Incentive Tolling Settlement factors and all Terrace factors. And those being the largest by far and away and then the revaluation component of oil losses as being an additional contributor, but significantly smaller than the first two.

And then I think you wanted to understand within the Incentive Tolling or within Terrace, the factors that are at work there. And again, I caution you, that will move around from quarter to quarter. In the first half, the Incentive Tolling cost savings was the bigger contributor, and the performance metrics was the smaller contributor. I would expect that that will balance out over the coursed of the year and we'll have roughly equal contributions from both. In other words, in the second half, we'll see less cost savings because typically our cost goes [inaudible] in the second half and more on the metrics side, and Terrace, the biggest effect would be the toll effect that we earlier referred to with the tax effect and the surcharge effect being smaller than the toll effect.

All right. Well, while I have you discussing the liquids pipeline, you provided some new disclosure on the Alberta Clipper in terms of capital spent within EEP versus Enbridge, Inc. Can you give us a sense of the $13 billion, how much is in Enbridge and how much resides in EEP?

I think we have approximated that as about $2 billion in EEP and the remainder in Enbridge. But let us just, as we go through the call here, we'll get back to you and confirm that number, Linda.

Thanks so much. I'll jump back in the queue.

Okay.

And your next question comes from the line of Sam Kanes with Scotia Capital. Please proceed.

Good morning, and Steve, welcome back from your academic experience. Steve, the question is probably for you. It's relating to the effect of produced tax rates going forward as opposed to trailing, and how much of that tax reduction within your provinces in Canada can you see net Enbridge shareholders over the course of your five-year agreements, or is there some settlement of splitting that or getting it back? I know you have to give it back to Ontario DGD, but can you go through some of the components in general, or specific, of what you'll be able to keep within lower tax rates going forward?

Well, for the bulk of the advantage of the lower tax rate comes from the federal and the Alberta reductions in their statutory rates. I think, Sam, you were asking how much of it we expect to keep going forward?

Yes.

And I guess, you know the one-time, the revaluation comes through now, and that certainly applies then going forward. I'm just, I'm not sure exactly what you're getting at in terms of what you can keep versus, are you getting at sort of a sharing issue or--?

Well, let me get more specific. Earnings are biased higher with a lower tax rate generically for all companies that are not regulated. Period. So, relative to the competition locally, so you have some regulatory regimes where you automatically have flow through, for instance, and that just doesn't matter from an Enbridge shareholder point of view. And you have whole toll corporate, which does matter to shareholders. I'm just trying to get the split between the impact going forward here that we should expect to your bottom line. I assume that over the five-year agreement plan, you have to give back your [inaudible], of course, because it might be renegotiated downwards.

Okay, thanks, Sam. I had gotten to misunderstand. I think that the key benefit is really going to be in the corporate segment, and it isn't too large. It really relates to the revaluation of purchase price discrepancies related to Enbridge Gas Distribution. That purchase a number of years ago, and also the Enbridge Income Fund. So I don't think we're going to see a lot of run rate benefit going forward into the future.

Sam, this is Colin. With respect to the liquid portfolio, that says, you know, flow-through tax, bases [inaudible], that tax allowance, but it largely reduces the benefit of shippers.

Of both liquid and EGG? All cases?

That's correct.

Okay, I'll stop there.

Thanks, Sam.

And your next question comes from the line of Bob Hastings with Canaccord. Please proceed.

Hi, thank you. The, looks like [inaudible] was developing to maybe in the hurricanes down South. So I was wondering what the impact might be, not from the hurricane, but just would we expect to see any maybe slowdown of production in anticipation of that, and when do we see, excluding hurricanes, et cetera, your actual operations get up to that $30 to $40 million earnings contribution that you originally were hoping for before all of this happened?

Okay, perhaps I saw two questions there, I guess, Bob. Number one, with regard to each and every tropical storm that may develop into a hurricane, we go through a very careful watch process and, depending on the tracking of the storm and the severity of the storm, we'll start to do a very logical and methodical shutdown process in conjunction with the producers in the area. We have not gone through that yet this year, touch wood, we haven't had any storms that have caused us to do that. We have built into our forecast for the year expectation of a number of down days due to that kind of shutdown, which we have gone through over the years, year after year. So we'll see how this storm season develops. As you know, there have been all kinds of forecasts about greater-than-normal storms due to warm weather in the Gulf, but also the forecasts seem to imply that they, storms will tend to move up the East Coast rather than to the Gulf, and I think we'll just have to wait and see. Maybe your model covers it, but our model couldn't.

No, I don't do my modeling based on weather, fortunately.

Going back to the second part of your question with regard to the original expectation out of the Gulf, I'm not going to be able to give you an exact date as to when we would expect to be up to that earnings contribution rate. It's going to depend an awful lot on exploration activity in the deep water Gulf and success rate, and we're still very confident that the geological prospectivity is there. We undoubtedly went through a setback as a result of the hurricane season last year, which has caused a lot of the producers to focus on getting existing facilities and platforms up and operational, rather than new exploration activity, although as you know from following the announced successes, there have been some good successes in the deep water Gulf. So it will definitely track upward over time because of the very strong positioning that we've got there, and we do still anticipate getting to the rates that we originally forecasted when we did the deal.

Is that before the new investment, or will it take new investments to get there or recognize how the insurance costs are rising significantly, as well?

Well, it undoubtedly will take new investments to get there, new opportunities to tie in wells as they're developed, because we'll have to extend our infrastructure out to the new discoveries, and yes, insurance costs are rising, and we always see that post a situation, as we did post-9/11, insurance costs went up and have now leveled off and in some cases come back down in some areas. We expect to see the same thing in the Gulf. As you know, we've also changed our level of coverage as a result of a very careful review as to what we feel is the appropriate level of coverage and are comfortable that we're going to be able to manage those costs going forward.

Okay, thank you very much.

Thanks, Bob.

And your next question comes from the line of Matthew Akman with CIBC World Markets. Please proceed.

Thanks. Our numbers so far this year, and I'm just wondering if Aux Sable results continue, sort of as we've seen them so far, I know you have to wait until Q4 to book those, but assuming things stay as they are, would you not be raising earnings guidance for the year on that?

We're not going to raise guidance, Matthew. Certainly as I mentioned, we do have some expectations of upside coming into Aux Sable. We're going to review really hard in the third quarter to see how certain we are of that developing, and making sure that crack margins don't turn around in the latter half of the year. But it does look like some solid upside there. I think there's room in our guidance for that. We had based in some expectation of improved performance from Aux Sable when we did guidance in January, so we're not really prepared to move guidance around at this point in time.

Okay.

As you know, one of the reasons for putting that agreement in place was to reduce the volatility around that earnings stream, and it's great to be in a position that we're in right now in having, as you know, it's a very cyclical business and doesn't really fit with the Enbridge game plan the way it was, but now we sit there with a very solid agreement with some upside potential associated with it, so it's just my opinion to say that we're very, very pleased with that agreement.

Okay. A totally different question on something that's supposed to be in service next year, the wind project in Ontario. There's some updated guidance that it might not be in service until late next year. I'm just wondering about your level of confidence of getting that project done at all next year or ever, given just some of the local concerns about placement of windmills and that kind of thing? What's your view on that project right now?

We're very positive on this, Matthew, and we do expect to have it up and operating next year. We did encounter some initial concerns and opposition to the project, and we undertook a very extensive consultation process with local communities and, and we'll continue to do so, but have found that our local support now is very strong. In fact, I believe the local town council unanimously voted in favor of the project, and we do expect to proceed. We did encounter a more lengthy consultation process than we had expected, but still expect to be on stream in the next year with the project.

One of the main issues, Matthew, is our setback, the issue of setbacks of the turbine towers, and, by the way, there's a lot of wind power professionals probably cringing over your referring to them as "windmills." But the wind turbine setbacks from property lines and buildings seems to be an issue that we need to work through, so that's what we're working on right now.

But I guess doesn't that still lead to some uncertainty over the project, at least the timing of the project? Because there's a concern over whether it might have to go through an environmental assessment at the province?

Sure. I think we'll have to work our way through that and make sure that we address the concerns of everyone that has them and has brought them forward, and we're just going to continue to work on that. So I think, if you're asking me does that mean that the turbines could go up later than originally planned, that is possible, depending on the outcome of those discussions. I think what's important, though, is that this is a very environmentally friendly project. It provides a lot of benefits to the Ontario power scene in terms of cleaner power and so on, and so we need to balance that against the very real concerns of the local people.

Okay, thanks. As an Ontario resident, we all hope that we get more power here, especially on days like today. Thanks.

Thank you.

And your next question comes from the line of Andrew Kuske with UBS. Please proceed.

Thank you, good morning. Given the extent of the capital program and quarter by quarter it seems to grow because of the number of opportunities that you have, could you give us a sense of any discussions you've had with the debt rating agencies as far as forbearance of your credit metrics during your capital buildup program?

Steve's going to come in on that, Andrew.

Sure. We have had discussions and will continue to have discussions, because one of the things that is prominent when you look at our capital program going forward and all of the liquids pipelines projects, in particular, that have been described is that ultimately they will strengthen the credit profile of the company. They're underpinned by very strong long-term contracts with creditworthy counterparties, and so they will strengthen the credit profile of the company. And so when you mention forbearance, we will be looking for forbearance, then, during the period of construction. So we'll be looking at the key credit metrics that we follow in terms of debt to capitalization, FFO or funds from operation to debt, and also FFO to interest. Probably FFO to debt is one of the more prominent metrics that we follow and that the rating agencies follow, and we'll be watching closely and looking for forbearance with the view that those projects are going to result in a stronger credit profile overall. And we really do not want to get into prefunding with equity the projects when that isn't necessary, in our view.

And then just as a follow-up, how far would you push your balance sheet on, really, any of those metrics? And would you be willing to use hybrids to fund part of your program?

We've considered hybrids. In fact, there's a lot of different varieties out there. Right now, I would say that we're probably not, we don't have hybrids first in line in our priority list. We think that the other approaches to funding our growth are probably better. We have over half a billion in free cash flow annually. We've got some of the capital that will be funded through Enbridge Energy Partners, we've got the potential for project debt financing on at least a couple of these projects, probably Southern Lights and Gateway being the most prominent. We do have an ownership interest in the Enbridge Income Fund that is higher than what we've publicly said we would want to settle at, so there's a number of things that I think we have in front of us to clear away that are more attractive than looking at hybrids. Although hybrid capital we will watch closely, its treatment as equity versus debt, we'll watch that closely and see if there's a fit for it in the cost equation of overall capital funding.

Okay, that's great. Thank you.

Thanks, Andrew.

And your next question comes from the line of Karen Taylor with BMO Capital Markets. Please proceed.

Thank you. I'm not sure who this is for. Can you just talk about Enbridge Gas Distribution and the timing of the maintenance and operating activities that I guess were deferred in the first half and how much was deferred, and how much is that going to affect the second half of the year?

Colin, can you respond to that?

Karen, I think that you're referring to that the quarter on normalization seen about $5 million better than the Q2 '05. Is that where you're grabbing this from?

Referring to what you said in your release and the MD&A.

Right, so I think you're seeing a trend where year to date we're right on track with 2005.

Yes.

So we're on track, I think, for the year. As we've mentioned on numerous calls for the past, quarterly operating and maintenance expenditures, they do vary quarter by quarter, so I don't know if we've got any significant variances that are unusual.

I believe we'll see how that unfolds in the third quarter.

Well, you said in the release, and I'm just trying to find it, I apologize for a second-

Page 5, first paragraph.

For the timing of operating and maintenance activities also increased earnings in the second quarter 2006. So, how did the timing of those items increase the second quarter, and will they have to be made up in the second half?

To a large extent they may be. Lower O&Ms in the first half could come back to some degree in the second half. And so that's why we do mention timing, because in that case, it really is timing. And I don't know if it's dollar-for-dollar timing between the first half and the second half of the year, but some of it will come back and reduce, then, earnings in the second half of the year.

Right. So how much will be pushed back?

I don't know. I'll have to get back to you, Karen. If you'd like, we can get back to you on that one.

Okay. And you talked about pushing back Gateway. We were looking for a full year contribution, I guess, from that project, previously, in 2010. And you mentioned pushing, that your customers wanted to see it in 2010 or 2011. Were you talking about the full year contribution or the actual in-service date being pushed back to 2010 or 2011?

Well, we're uncertain at this point because we're just in the process of putting these commercial arrangements in place, Karen. I think it's fair to say that as a result of delays in some of the upstream developments here, that we would expect that startup will occur in the late 2010 or 2011 time frame. But it's very difficult at this point to nail down the specific timing until we get those commercial arrangements in place, and as soon as we do that and we're able to get our filing in, then we're going to be able to better predict what the timing will be on the project.

And would that be pushing back, then, both the bitumen and the condensate line together as a package?

Yes, we would plan on building them together to achieve the synergies that we previously announced of joint construction of the two.

And just lastly, when we talk about the project, there are a lot of projects, there still is on the table the Pembina project for 100,000 barrels per day of condensate. Same route through BC with a, advertising, at least in materially a sooner proposed-in-service date. You're looking at late 2009. And so is deferral of Gateway, how does it affect the overall competitiveness of that initiative vis a vis the alternative?

Well, as I said before, we were out way ahead of everybody else on that initiative, and on the Couval initiative, and have some significant advantages of doing the joint construction, so I think you need to take a look at the advantages and the amount of time that we've been working on this in assessing how we rank relative to competitors. I have not looked at their proposed time frame. All I know is we've been in the field for some time working on this initiative. There is a ton of work to be done, and unless they move out ahead of us, I don't know how they can finish before us. But I'll leave that to them to explain. All we can do is indicate where we are, and there is a lot of work to be done. It's a lengthy pipeline project through some difficult terrain, and that's one of the reasons why we feel, because we got out so far ahead of others, we've got a distinct competitive advantage over them.

Just a last thing on Gateway, and I promise I won't ask another question. Does the offshore moratorium on development of fossil-based resources off the West Coast, does that also preclude the tankage of bitumen in certain areas or not?

No, it doesn't, Karen, and it's a very good question and a very good point, in that a lot of people have confused the two, and have--quite knowledgeable have indicated that there is a tanker moratorium. But in fact there is not. They have confused the two and have felt that it does extend to tanker traffic, but it doesn't. And that has been clarified by a number of senior officials in BC, but it's going to take a lot of work in order to make people understand that that moratorium does not include tanker traffic.

Thank you both.

Thank you. And by the way, just to get back, Linda, on your question. About $1.3 billion associated with Southern Access is to the partnership, and about $700 million of Clipper costs. Around $2 billion, as I indicated. There may be as much as another $0.5 billion with initiatives along the way, so somewhere in the $2 billion to $2.5 billion mark of that $13 billion.

And your next question comes from the line of Maureen Howe from RBC Capital Markets. Please proceed.

Thanks very much. Just pursuing this Terrace issue, and this is an issue that seems to cause me no end of difficulty wrapping my mind around, but you did provide, in this supplemental information, a Terrace, a breakdown of Terrace earnings, which is helpful. So I guess this is for Richard, if I understand this correctly, and I'm not sure that I do, but it looks like you're booking revenue pretty much in accordance with budget. But taxes are cash based, and so if I understand correctly, in 2006, you're benefiting from booking revenues, and again, with accordance with budget, although there could be perhaps [inaudible] reflecting in creep in toll, but with lower throughput, your taxes, which are cash, are lower, and your bottom line is higher.

That's a great summary.

So, there's a note, and it's kind of counter-intuitive, not that regulatory accounting isn't counter-intuitive, because if often is, but there's a note here that says over time, or at some point in time, you could basically end up booking twice as much in tax. In other words, the cash is coming in revenue and the revenue is coming in and therefore your taxes payable are double than what we might be seeing, for example, in this year.

Yes, it won't all necessarily fall in one year, but there will be that catch-up effect in the future.

And do you have any idea this time, Richard, looking forward, talking to producers, trying to forecast the volumes of throughput on the system, when that might happen?

Yes, we certainly have an idea of that and expect that it will, we're probably seeing the best result at the moment and will start to see some reversal of that beginning next year and moving into the future. Again, cautioning that there are a lot of moving parts to the equation here, and although that could go in the other direction, there are other factors that are moving in the contrary direction. So I don't think we see that in terms of our overall results, as being something to be concerned about.

So in terms of our financial model, Richard, are you saying, then, that the swing won't have a material impact on our forecast? Is that reasonable?

I think that swing by itself could make a difference in 2006 and moving forward, but I think there are other factors that will counterbalance that in our overall results. So in 2007.

Okay, so we'll start to see a bit of a swing in 2007 and then going forward.

And I think the good news in that, Maureen, is that it means Terrace capacity is being used, we're moving into the zone of throughputs where that traunch of capacity above the SEP through capacity is actually being utilized and converting to cash tolls from CRV.

Great, so, I guess it's good and has sort of a dampening effect on swings some. Because, you're not, I guess you're getting hit on SEP II, but you're making it up on Terrace? Is that fair?

Actually, no. SEP II, I think, is all good news. That's the one that would be, is it the sliding RV scale, you remember from-

Yes, yes.

Okay.

So SEP II is full, is that--?

No, filling.

I think what Maureen said is effectively correct. We're not doing as well on the SEP II this year as we will do next year. Next year we won't do as well on Terrace because we'll pick up some of the taxes, so that is one of the countervailing factors that I just mentioned.

Okay, well, that's helpful. I'll scratch my head and get back in the queue.

And one of the issues there, of course, Maureen, is the forecast throughput on the system, and that is very difficult to forecast as a result of the fact that these new chunks of production that are coming on are coming on in such big chunks, and if we have delays due to difficulties in startup in the new projects, or if they have operating problems, that alters our forecast fairly significantly. It's not like the good old days, where if a well or two went down, it didn't have that much of an impact on the throughput. And now when we lose a producing facility, it has a pretty big impact. So it becomes more difficult for us to forecast until we get a number of these on stream, and then it will smooth out over time. So that's one of the reasons for our uncertainty around the timing on Terrace.

Well, just on that note, and before I get back in the queue then, Pat, we certainly saw a number of things hit production last year in 2005. Suncor fired their recuse at Syncrude, and it looks like we're not really seeing a big ramp-up in throughput this year.

Well, although we have had some recent operating problems that have resulted in that production not ramping up as quickly as we expected it. Definitely it's higher than it was a year ago, but it, of course, Syncrude's recent problems have checked it for better production off, and I believe that's in the process of coming back on right now, Richard. So once again, these are big, complex plans that take some time to iron out the operating issues.

Okay, thank you.

And your next question comes from the line of Winfried Fruehauf with National Bank Financial. Please proceed.

Hello, thank you. Regarding the valuation of future income taxes. Is there any part that belongs in the second quarter, or is it all beyond the second quarter?

Okay, so you're saying that earned tax rate change is effective in--?

The first of April.

And, looking through that, most of the provinces are on the federal reduction. The Alberta reductions were effective April 1, so that's the 11.5% down to 10%, so there's a small impact in the quarter, but down in a quantum for you. I think it's pretty minuscule.

That's really phased in July 1 of '06 and onward.

Okay. And I have a follow-up regarding CustomerWork/ECS, which looked quite anemic in the second quarter and also year to date. What are the causes for this performance?

Q1 was probably higher than it should have been, and Q2 is lower than it should have been, resulting from a couple of cleanup items, including a write-off of some software licenses that were required. So it should be pretty clean going forward.

But you are down for the first half compared with last year's, and what is the reason for it? Or what are the reasons?

Well, I mentioned I think we wrote off some licenses, there, a couple million dollars, so that's going to keep the year-to-date number lower.

Those write-offs are now complete, but those would have shown up in the comparison between '05 and '06.

Is there any kind of guidance you compare to through out with regard to annual contributions?

No, I don't think we can get that granular in terms of the customer works contribution. I don't think we'd want to guide forward, other than knowing it. I think the biggest thing moving around the last year has been those software license write-offs that we needed to do.

But as far as difference from the numbers are concerned, are they deteriorating? Are they improving? Or are they evolving as expected?

They're stable and above as expected, Win.

Thanks.

And your next question comes from the line of Andrew Fairbanks with Merrill Lynch. Please proceed.

Hey, good morning, guys. Just a strategic operational question. I wanted to get your opinion as to whether the dynamics for heavy dilbit or synbit are changing. I ask that, because it seems the upgrade economics are shifting somewhat with some of the cost overances we've seen on the oil sands. I think industry is becoming somewhat more favorably disposed to doing upgrading remote from both the oil sands and even Edmonton. As you look at your system, does this imply that you're seeing an at-the-margin increase in demand for particularly heavy, long-range pipeline capacity, and generally, do you expect that the overall crude oil slate through the system will be somewhat heavier than even what you've anticipated already?

Very good and complex question, Andrew, and a difficult one to answer, but you are right in suggesting that there appears to be a bit of a shift in the manner in which we will dilute bitumen, whether it is dilbit or synbit, and you're right, then, as a result of cost pressures here in western Canada, there is more concern about the timely and cost-effective construction of upgraders. And obviously, with the announcement of our Southern Lights project, this will help producers considerably in knowing that they are going to have an available source of diluent. And therefore, I would suggest that probably the pendulum has swung somewhat in favor of dilbit versus synbit. However, in my view, it will be a combination of the two. There definitely will be upgraders built in Alberta, and there will be synbit used, but to the extent that we can bring in the relatively cheaper dilbit, I think it will be a preferred option for diluting bitumen. I'm not suggesting that there won't be reasonable economics and upgrading and shipping of lighter crude into the U.S. market, because of its slightly less constrained market there. But in terms of synbit/dilbit, yes, I think there's a little bit of a swing in favor of dilbit at this point.

As you think about the product going out as well at that point, do you see more of a swing in place towards moving dilbit out as opposed to more of an upgraded crude oil slate?

Well, that is possible because of rising costs here. The other counterbalancing perspective is that I know that the Alberta government wants to, as much as possible would like to encourage upgrading and value added within the province, but at the same time, I think it's fair to say that the government officials realize that the very best thing they can do is broaden out the markets for Canadian crude to maximize the price received for the crude and therefore the royalty dollars and income to Albertans.

So it's a little bit of a difficult assessment to make as to whether, to what extent you encourage upgrading here. I think it's fair to say that ultimately the market is the only way to decide on that, and that it will be a combination, with some producers seeing the advantage of producing an upgraded product because of the easier marketability, but also the fact that they're going to face higher costs in doing so. There definitely is an advantage of using diluent in order to move bitumen over synthetic, because that is a lighter product and it takes less diluent to do that. So once again, I would suggest it would be a preferred product where available.

Oh, that's great. Thanks, Pat.

Thanks, Andrew.

And your next question comes from the line of Jimmy Henderson with Jimmy's Pipe and Wire. Please proceed.

Yes, good morning. This question is for Steve. Steve, I was asking a question here if there's any contingencies for any mitigating situations that all companies face these days, especially successful companies like yours. Is there any contingency?

Gee, what do you mean by contingencies?

There was just a very small incident there of an 0-something regulatory thing, very small amount in the total picture, that just got taken care of. I don't know the timing, maybe a month ago, or a couple of weeks ago. And I was wondering if there's anything else here that the company, without going into detail, what that might be, but is there any contingencies that the company is addressing that might come to the forefront, that the company's kind of looking at?

Are you referring to our Garland late payment penalty settlement in our distribution business, possibly?

Well, I was referring to that one, that was settled amicably, and seems like it was just a very small thing, just to kind of settle that. I was wondering if there's anything else. I'm not dredging up the past thing, but is there anything else here that might be [inaudible], that the company is looking to and kind of addressing and knowing that might be something going on that they might have to address?

Okay, we understand your question. And Steve, would you like to address that question?

Yes, Jimmy, there's probably two other things that I think that are talked about. One is a landowner claims matter referred to as the [Cathlock] claim, and that has been a longstanding discussion that involves not only our company but others as well, around the issue of use of land in rights-of-way, primarily in Ontario. And the other one is an incident in Toronto known as the "Bloor Street Incident" from a couple of years ago, so both of those are items that we have provided contingency for, and await developments on. There aren't any other major issues in terms of contingencies that I can think of right now.

Okay, well that was pretty much the question, so thank you and please, guys, have a good day, and it was a very interesting conference call here so far.

Great, thank you. And by the way, those issues are discussed in the financials, Jimmy, if you'd like to look up and if you have any follow-up questions, please give us a call.

And your next question comes from the line of Linda Ezergailis with TD Newcrest. Please proceed.

Thanks so much. Just stepping back and looking at your business holistically, I just wanted to get an update from you on your longer term strategic possibilities outside of liquids. Pat has mentioned that, during the conference call, that there are a lot of opportunities in your natural gas business. Certainly, we've seen it grow from almost nothing a decade ago, virtually nothing, to about 11% of earnings last year. If we extrapolate forward by maybe 10 years and the world unfolds as you expect, what percentage might we see gas pipelines becoming of your business, and this is a little bit more blue sky, but potentially your power business as well? I guess, just looking at your international business, you have given us some guidance as to what composition of earnings you'd ideally like those to be, so I'm wondering if you maybe start painting a picture for us on some of your other non-liquid businesses.

That qualifies as the most difficult question of the day, Linda, because looking forward ten years is always a challenge in this business, and first of all, let me look back about ten years, and ten years ago in the company we were concerned that we may not get enough growth out of the liquids business, and hence made the move to get into the natural gas business, acquired the gas distribution franchise in 1994 and then levered our position into Alliance and Vector and, of course, about five years ago made the Midcoast acquisition and then a year and a half ago did the deal in the Gulf in order to increase our gas footprint.

But that all comes from a feeling a decade ago that we might not have that many expansion opportunities in the liquid system, and look where we are today. So I guess what I'm saying is that maybe you shouldn't trust my ability to forecast forward ten years. However, let me say that I think ,even though we said a decade ago that we were entering the era of natural gas in North America and we maybe did for a short period of time until prices started to run up, I do think that natural gas is a very important part of the energy supply picture in North America, and will grow in prominence over the next decade, and it will come in the form of opportunities in terms of LNG, in terms of Alaska, and other frontier gas. It will come in terms of distributor power generation opportunities, but natural gas will continue to be a very important part of the energy infrastructure development opportunities.

It's a long way of saying that I think that it will grow in prominence and importance to us. Can it catch up to the liquids business in importance? That's going to be a real challenge, considering the huge budget that we've got going forward, and the driving force of the oil sands development. But I think it's better to say that we have positioned this company to take advantage of the trends that I'm referring to, where in Texas and east Texas, north Texas, and then the Anadarko, three of the very best places in North America, we're the biggest gas gatherer in the deepwater Gulf. We as yet don't have any position in the Rockies, but I think that this extension of Alliance and Vector into Lebanon will give us an opportunity to better serve the northeast U.S. and possibly provide some solutions to the Rockies down the road. So, a long way of saying that it would be a very important part of our strategy, and I think provides us with a very good balance. I also feel that we are the best positioned company to take advantage of northern gas development, and whether that's in the form of expansion and buildout in the Alliance system as a BDC takeaway for northern gas, or whether it's to be involved in the Alaska gas pipeline because of our northern pipeline experience, I think we're very well positioned there, so I look for great things out of the gas business. Right now they're scrambling to try to catch up with Richard and the crude oil projects that he's got on the go.

And in terms of your power generation business, are you looking to grow that to be anything material, or will it continue to be opportunistic?

It will continue to be opportunistic, and it will continue to be confined to our franchise area in Ontario, and we'll continue to look at opportunities there, because we then have the synergies associated with our gas services function and our gas distribution infrastructure. And if we are able to make some inroads there, then we'll further lever off of that. But at this point, we don't have a lot of large prospective opportunities. We will, we'll see how that develops over time. But as I'm sure you can appreciate, we've got so much on the go with this organic growth on the crude oil side, that we're not missing having a power platform today.

And I realize this is not of huge magnitude, but there was silence on the call in terms of CO2 initiatives. Some of your competitors have been talking up the potential and the opportunity in Alberta. Did you want to comment on that?

Yes, I'll make a very general comment, and then I'll ask Richard to add a little more specific information because we've been very involved in studies here in the province of Alberta, right from day one. And certainly, if you look broadly at North America, I think we have one of the best opportunities here for a CO2 sequestration system, and reinjection for the purpose of enhanced oil recovery. And it's just going to take a little while to work out the details and some of the challenges around cost-effective recovery of CO2 from current large emitters, and then the recognition of value associated with CO2 associated with the form of a flood material. But we are involved in provincial studies to do that. Richard, do you want to elaborate at all on that?

Yes. Well, I think that pretty well covers it, and CO2, it's not something that we felt at this point has reached a level of prospectivity that justifies saying much about it in public disclosures. It is something that we are working on. It is part of our strategy. The same group that basically addresses pipeline opportunities within Alberta has CO2 focus, and if there's something to capture there, we certainly are prepared and will have a shot at it.

That's great. Thanks.

And your next question comes from the line of Maureen Howe from RBC Capital Markets. Please proceed.

Thanks very much. This is a question that you have addressed in the past, but I guess just in terms of an update, you talked about finalizing the agreements on Gateway, and I'm just wondering, what are the hurdles that you're currently facing? We've seen other pipelines that you've sponsored sort of signed, sealed, and delivered in a much shorter time frame, but the Gateway just sort of seems to go on and on, and I'm wondering what is it, where are we, and is it a timing issue, or is it producers still not wanting to sign contracts with the Chinese? What is the issue there?

The issues are complex, Maureen, and let me do my best at describing them for you. First of all, we're talking about a brand-new market for Canadian crude, and as a result of that, there are deliberations and considerations on both ends of the transaction. As you know, we feel that this pipeline will be anchored primarily by Chinese refiners and Canadian producers. Chinese refiners that traditionally have not taken crude oil from Canada and therefore are looking for a level of familiarity with the projects and the people involved before they do a deal. Similarly, Canadian producers that have not traditionally moved crude oil out of the U.S. Midwest market, some minor exceptions to that, and hence, the lack of familiarity in doing business deals between Canada and the U.S. We think that those issues are being overcome, but it just takes a little while for everyone to feel comfortable with the transactions.

We obviously are going to be looking for major anchor tenants in the pipeline, and we view it as being as much a Chinese pull as it is a producer push, although we recognize the huge benefit that will come to Canadian producers from having the line in service. Everyone tends to more quickly default to the traditional markets as the quick and easy way to get deals done, and that's why we've seen progress on Southern Access and Southern Access Extension, and Southern Lights, simply because it's more familiar territory for Canadian companies to deal in. So that's the best I can come to describing some of the challenges around it, and yet we're very, very confident that this pipeline is needed by both groups, Chinese refiners and Canadian producers, and have been getting very strong support and encouragement to continue to push this through to completion.

But it seems like as time goes on, we keep seeing other pipelines proposed and, in fact, firm, binding commitments signed with them, and so you're confident that it's needed, but are you confident that you're going to get the shipper commitments--firm, binding shipper commitments to support it?

Yes, I am, and that's because you only need to look at the light to heavy differentials and the huge success of some of the initiatives that we've already completed, like Spearhead and the Exxon-Mobil line reversal to realize the huge benefit to the broadening of markets for Canadian producers. So I am so firmly supportive and in belief of those fundamentals, that I am convinced that this line will get built. It's just going to take some time to get the parties comfortable with doing this business with one another. It is badly needed, Maureen, by Canadian produces in order to get the optionality that they need and, to tell you the truth, it's badly needed by Chinese refiners to get the optionality they need in terms of crude supply. So the fundamentals are all in favor, and we're confident that we will get it done.

Okay, thank you.

And your next question comes from the line of Jimmy Henderson with Jimmy's Pipe and Wire. Please proceed.

Yes. Just for follow-up, this might be a question for Jeff. I think you do have a Jeff. When you mention the name Lebanon, could you please tell us geographically, Canadian and United States, what areas that really is, as in the news, you know, you hear about Lebanon, and I'm trying to differentiate where that acreage or where that type of pipe distribution is in Canadian or United States territory?

Okay, yeah, Jimmy, sorry. This is not the Lebanon that's in the news these days. This is Lebanon, Ohio, and is an extension from either Alliance or Vector through Indiana and into southwestern Ohio and to the Lebanon gas up there. And it would be an interconnecting part to the what's called this Echo system that comes up from the Gulf.

Is there any geological studies or anything that has to take place, or is on the board, in regards to that, as you hear about that all the time in different areas? It sounds like everything is going forward. I just know that sometimes different issues come in, but it seems like all your projects, all that stuff, all those kind of issues are pretty much, have taken place, where they've been looked at and it doesn't delay major future plans and stuff. I mean, those things you have to go through on a normal course anyway, but they just need brought up by different things, so my question, again, I understand now that you clarified the Ohio area, but is that a current line that's already functioning, or is that something else there that is a future product? Is that an up and working area now?

Well, the Alliance and Vector pipelines are up and working. The extension that we're referring to would be new pipe that would be built over to Lebanon, and as Steve indicated, with the interconnected Duke system, which is in existence. And there aren't any geological issues, but there are issues, of course, around acquiring right-of-way for a new pipeline construction, but we don't expect any major problems with this extension.

Okay, thanks a lot, guys.

And your next question comes from the line of Winfried Fruehauf with National Bank Financial. Please proceed.

Thank you. Regarding Gateway, is Enbridge still planning to deliver diluent bitumen for the California market, or has this all shifted now towards the Far East?

We definitely would plan on providing some diluent into the California market as well, Win, yes. We expect that as much as 50% to 75% of the volume would move into China, probably as much as three-quarters of it into southeast Asia, but the remaining 25% probably into the California market. And, by the way, I should have mentioned this earlier when Maureen was asking about Gateway, but as you probably noticed, the Koreans have now taken an interest in the oil sands as well, and we have had and will continue to have discussions with regard to moving some crude oil into Korea.

Well, if you succeed in that regard, would the amount of material that you're currently planning or hoping to ship to California be reduced?

No, not likely. I think that what we're saying is that we would, as I said, 50% to 75% into China, and of that, a portion could go into Japan or Korea. We're looking at both those other markets in southeast Asia.

And if California materializes, would there be any opportunities for having a return cargo of diluent from California refineries to Kittimat and up to Edmonton?

That's something that I don't think we've really looked at. Probably volumes would be relatively small and hence may not be economic relative to diluent source in the Far East, which would come in in large volume into Kitimat, Win, but it's undoubtedly that our project people would look at along the length.

But am I correct that you have concerns all along to obtain the return cargoes of petroleum from the Far East to Kitimat so that the tankers departing from Kitimat would not be returning empty?

Yes, the idea would be to bring in a tanker load of diluent, unload and load a tanker load of crude, and move it out so that you've got effective tanker utilization.

Thanks very much.

And your next question comes from the line of [Reg Solomon with Craig Breach]. Please proceed.

Hi there. I know you've spoken about Gateway just a fair bit today. And just to follow up on Winfried and Maureen's comments, it sounds to me like the stumbling block really comes from refining capacity in southeast Asia. Can you speak to whether there will be Chinese, Japanese, or even Korean refineries that have the ability to refine Canadian heavy?

There is some ability in China to refine Canadian heavy today. However, the Chinese companies who we've been in discussion with have indicated that they would purpose build a refinery to take Canadian crude, and they are confident that they can get their refinery built and on stream as quickly as the upstream developments will occur here, so that that won't impact on the critical path with regard to the project. So some capacity today, but the volume that we're talking about moving most likely would be a purpose built refinery in China.

Okay. My understanding, just from speaking to folks in Japan, is that from a sort of desulphurization standpoint or from a performance standpoint against refineries in Japan differ significantly from North American refineries, and therefore it might be a little bit more difficult for them to process bitumen. Are you getting a sense of that from the others who might participate?

Well, I think probably to the extent that we did have shipments into Japan, there's a good chance that those would be synthetic as opposed to dilbit, so I think you're correct in that the ability of Japanese refineries to process dilbit is relatively limited.

And given that 50% to 75% of the heavy from Gateway in southeast Asia, is it fair to say that failing any sort of shipper commitments from that region, it in effect might delay Gateway beyond 2011 and therefore, because you're not going to proceed with the bitumen pipeline, that that would actually push back the condensate line as well?

I think your assumption is a fair one, that if we don't get a significant Chinese shipper commitment, that it would be, take us longer to accumulate enough producer volume out of western Canada, producer driven rather than refiner pull volume, in order to keep Gateway on the current schedule. We have definitely been assuming that we will have a major Chinese refiner wanting the crude oil.

Yes. But in absence of getting that contract or getting those commitments, the condensate line won't get built without the heavy oil line as well. That you wouldn't proceed, regardless of the demand for the condensate in Alberta.

We would most likely want to do those at the same time, and if we arrived at that position where we thought there was going to be a significant delay, and we're not there, but if we did, then I think we'd just have to reassess as to whether we wanted to try to proceed with the condensate line on a stand-alone basis based on this demand that we've referred to, but at this point that is academic, because we do feel that we will do the two together.

Okay. Thank you very much. Those are all my questions.

But there's a pretty significant overlap between the parties that are interested in shipping on the condensate line and parties that are interested in shipping on the crude line, so that's not a total overlap, but I think the two will achieve commercial support at the same time, most likely.

Okay. That's very nice. Thank you very much.

Thank you.

And gentlemen, I'm showing no further questions at this time. Ladies and gentlemen, this does conclude today's question and answer session, and I'd like to turn it back over to management for any closing remarks.

No, nothing here except to say that we appreciate your continued interest in Enbridge and we look forward to talking to you on the next quarterly call.

Ladies and gentlemen, thank you for your participation in today's event. This does conclude the presentation and you may disconnect. Have a great day.